While the 40 year mortgage may not be available to you at this time, there seems to be a move on the part of Freddie Mac and Fannie Mae to consider backing these longer term mortgages, especially in higher priced market areas. Stretching the time to pay back a loan does reduce the payments, so it can be enticing to go from 30 to 40 years for people who are buying in high priced markets. And, if a lower down payment is all that’s available to them, this also cuts the payments.
However, there are trade-offs: Generally, a quarter point or more higher interest rate will be charged for the longer term loan. With the higher rate, the difference in payments isn’t as much as many would hope. One example of a $200,000 mortgage yielded only a little over $100/month in savings by going to 40 years. The buyer builds equity at a snail’s pace. Most home buyers have no intention of taking their loan all the way out to 40 years, or even 30. The impetus to take the longer term is usually only related to the decrease in payments. What an analysis will tell them is that taking out a 5/1 or a 7/1 ARM, Adjustable Rate Mortgage, may be a better decision. Doing so will lower the payments, and also will result in significantly more equity build-up during that 5 or 7 year period. An actual example showed that our $200,000 loan would have a balance of $192,993 at the end of 5 years. At the end of that same five years, a 5/1 ARM would have had a balance almost $10,000 lower, at $182,996. Discuss your situation thoroughly with a lending professional, and analyze short and long term influences of your mortgage choices.